The Social Media Monopoly

Interesting article on Wired today - 5 Thinks That Could Topple Facebook's Empire. It's fun and easy to create this lists - 5 things that..., 10 things that... - but thought-provoking nonetheless.

Terms on a patent are 20 years, but businesses of the Facebook sort are difficult to make patentable, let alone enforce any legal restrictions on design or usability. (Ask Apple how that went with Microsoft a few years back.)

This effect shrinks the window of opportunity for a company like Facebook to capitalize on their monopoly and create an infallible social network medium. But, infallibility is more of a quixotic notion that one borne in reality. Technology companies with enormous market and mind share are constantly getting nipped in the heels by direct competitors or emerging niche players in the very same industries that the Facebook-like companies helped to create - Skype with other VoIP providers or eBay with UBid, ePier, atOncer... Heck, even Facebook took over the social media space created by previous players like MySpace (remember them?).

Facebook has been around a while and still emits a feeling that it's still in start-up stage. Monopoly power is a good thing - that's what drives entrepreneurs to create new products and services because of the clear profit motive. Would be a shame if they missed their profit opportunity but waiting too long to capitalize.

Sixth Sense Computing - Pranav Mistry on TED.com

Working from the in-laws basement this week and took a little retreat time to watch a few TED.com videos. If you want to get blown away by things like dialing cell phone by touching your fingers or seeing if you flight is on time by looking at your boarding pass, this is for you. (And I am really not doing this justice...) It's interesting that Mistry talks about bring the computing world into the objects world. His concept, to me at least, is bridging the gap between reality and the virtual world.

Greenspan on "This Week" with George Stephanopoulos

Was fortunate to flip on the TV the morning to catch Alan Greenspan on "This Week" with George Stephanopoulos. Here are some key statements during the interview with some additional explanation in parenthesis that I've added.

• The economy loses skills with elongated unemployment (When workers are not working and keeping up with new technology, new processes, and deploying new innovation, the skills of the worker deteriorate and fall further behind competition in the global economy.)
  

• Just after the financial crash, business (defined as economic participants) expected production and consumptions levels to fall off far more than they did. This spurred business to cut employment and production more than could have been economically supported. As a result, we're getting "horrendous" labor productivity numbers, meaning that the output per worker is declining.
  

• On unemployment, Greenspan noted that unless there are more than 100,000 new jobs a month, the unemployment rate will not improve.

• On government intervention and the stimulus package, the focus should continue to be on trying to get the economy going, but don't be counterproductive. As Greenspan stated, "we're in a recovery, his is what a recovery looks like. Looking back after this is over, we'll see ups and downs on a graph but look right through them right through them." The stimulus package is only 40% spent, so before considering a second package, the remainder (Evan Bayh on Fox News Sunday with Chris Wallace said he would have liked to have the stimulus go into effect sooner.)

• On GDP growth, Greenspan predicted 2.5% GDP growth in the third quarter and sees the numbers coming in higher than that once the estimates and revisions are completed. We're getting close to end of job loss, "but this is not the same as unemployment going done. We'll get to 10% barrier and stay there for a little while."

• On temporary actions, he feels that measures such as extended unemployment benefits are needed in the short term and is not a stimulus activity but may have some stimulus effects.

• On health care, the real problem exists in health care because of the huge fiscal hole as seen in Medicare. There is significant issuance of treasury bonds to finance the budget deficit. Historically we have kept our debt well below the borrowing capacity but that cushion is being tested which will affect LT interest rates. "Budget neutral is not adequate, weed to have address the long term."
  

Milton Friedman on "The Open Mind"

In researching for an article under development, I found these outstanding video interviews with Milton Friedman, hosted by Richard Heffner on "The Open Mind." This was a television series started back in 1956. Both interviews are approximately 30 minutes long.

The first interview was conducted in 1975. Discussion topics focused on individual freedoms and the inefficiency of strong government intervention to solve social and economic issues:

http://www.youtube.com/watch?v=JfdRpyfEmBE&feature=related

Friedman went on to win his Nobel Prize in Economics in 1976. Heffner followed up in 1977 with the second part of the interview:

http://www.theopenmind.tv/tom/searcharchive_episode_output.asp?id=493

Milton Friedman on Phil Donahue (1979)

Heard this on the radio on Friday -

http://www.youtube.com/watch?v=RWsx1X8PV_A

This is the reason that Milton Friedman won a Nobel Prize in Economics. Taped in 1979, think about the parallels that we're hearing in today's economic and political activity.

Let's stop with the talk about redistributing wealth as a means to solve our our personal economic and social situations.

Perspectives: State of Venture Capital

This slideshare presentation developed by TheFunded.com audits the state of the venture capital capital. It's a nice synopsis of a huge challenge - getting money to innovators. Whether venture capital industry is the answer doesn't matter. What matters is that we continue to develop innovation as a pipeline to new technology leaps and healthier long term economic growth.

Judy Estrin tackled this concept during her recent presentation as part of Stanford's Entrepreneurial Thought Leader Lecture - "Is Innovation Withering on the Vine." Whether you agree with the politics of the podcast or not, the principle remains the same - the innovation pipeline is slowing.

This supports some of the thoughts presented in a previous article - "Venture Capital: Moving Up the Ladder" - posted back in August. This isn't surprising to most in the industry.

Revelation is not the issue, resolution is...

(And a "Thank you!" goes to Mike Simonsen for pointing out both the presentation on TheFunded.com and Judy's participation in the Stanford series. That's why he's the boss...)

Viva Monopoly!

With the launch of Google’s new browser – Chrome – I can’t help but consider one of the basic laws of market economics:

Monopolies are good.

Back in 1997, strategy+business published an interview with Paul Romer, a Stanford economist that has been a leader in the development of new growth theory. In the article, Romer discusses how the possibility of monopoly gives incentive to the private sector to innovate new products, so that they may corner the market for a period of time and generate increasing returns on investment.

About that time (in 1997), Microsoft was considered the dominant software company and expected to run the computer world for generations to come. Since then, it's endured tremendous pressure from its destruction of Netscape and ongoing anti-trust battles across the world. I refer to Microsoft, because in the last decade we’ve seen Google emerge as the new leader of the information age. In leveraging their search engine technology and other innovations, they’ve launched Google Docs and Google Spreadsheets to compete with Microsoft Office. Their search has reorganized the way the companies build websites and deliver content. With the release of Chrome, Google is hitting Microsoft head-on in the web browser arena where Microsoft had the assumptive monopoly less than ten years ago.

From October 2007 through August 2008, the Windows operating system has gone from 92.5% to 90.6% market share, with Mac and Linux slowly creeping up. This 2% doesn't seem like alot, but ask Microsoft if they're worried. (Internet Explorer has lost 6% market share during this same period.)

Recently, Firefox nabbed 17% of the browser market and Safari grabbed another 6% according to Market Share. With Chrome now reported to have 1% of the market in just 24 hours, it seems that the monopoly is less than so nowadays.

Going back 20 years to the mid-1980s, Microsoft was the young, nimble company targeted the entrenched monopoly of the terminal computer. Seeing a pattern here?

No company, especially in the IT industry, is safe from competition. This is what drives Silicon Valley and the world to build the better mousetrap. Ten years from now, you'll be reading about how Google’s dominance is fading because of some other new emerging leader. Ten years is just a single business cycle in economic terms. While monopolies appears to exist, they don't last very long. That's why companies strive to acheive them, protect them, and maximize on them, because they know that they are fleeting.

Capitalism works if you let it breathe.

AltosXplorer - Cooler than a Liger....

What could be cooler than this?

What 'til you check out AltosXplorer.... I'm referring to it as the "liger of the real estate market."

From our press release:

AltosXplorer is the first rich internet application that enables users to:

• Instantly query the vast Altos Research real estate database: Altos publishes hundreds of useful statistics covering nearly 10,000 zip codes around the country every week. AltosXplorer opens the massive 2 terabyte (2TB) Altos Research database to live queries.
• Automatically chart local market trends: Just a few clicks to grab local market trend charts for your blog, emails, or unique individual analysis.
• Quickly analyze today's conditions: Sift through mountains of statistics to compare local market opportunities, identify previously hidden trends, and make decisions.
• Export the data: Easily save graphical charts and export historical data directly to your PC.

We're just so proud of this product, we're telling everyone we know - and so should you! Check it out here.

Google's Employee Retention & Entrepreneurship

About a year ago, I explored Google’s investment per employee during their growth phase, noting that the Google’s employee retention might suffer in the long term as a result of simple mathematics. As Google continues to grow its revenue and employee numbers, maintaining the investment rate per employee to pay for its innovation and development would become increasingly more difficult.

As is well-known, Google inherently breeds entrepreneurialism by allowing its employees to spend 20% of their time on self-developed projects. Projects are presented to Google's product councils for further internal funding and support. Once the “true entrepreneurs" (which I am defining in this case as individuals that would actually leave their corporate binds to strike out on their own) learn the skills necessary to develop and incubate a new innovation, it is a natural progression to expect that they will move on to work on their own.

The brightest minds that have been with Google since the early days have little monetary incentive to stay now that their share options have vested. Those that came aboard Google after their successful IPO and subsequent share price growth have even less upside to sticking around in the near term. Why give up self-developed intellectual property to the “mothership” when you can add the Google brand name to your resume, retain ownership of your idea for a few years, and pursue your own interests afterward. This raises an interesting management question – is it possible that current Google employees are sand-bagging? Could they be working on only a part of their own ideas while working with Google, but saving their very best for a planned departure in the near future?

Adam Lashinsky’s article a recent issue of Fortune Magazine – “Where Does Google Go Next?” – examines the departure of key personnel at Google leaving to create their own start-ups. Some of the individuals and examples that Lashinky cites are Paul Buchheit who co-founded of FriendFeed (with three other former Googlers), Yanda Erlich who founded Mogad, and Nathan Stoll who founded Mechanical Zoo (with other ex-Google engineers). Which of these companies (if any) and their core ideas where actually developed during employment at Google?

The natural metamorphosis of many start-ups is to create a product model legitimized through a rapidly growing user base (and sometimes even paying customers!), and then an exit via acquisition to a larger firm seeking new technologies and products not otherwise developed in-house – companies like Yahoo! and, of course, Google.

Following this line of thinking, Google’s growth creates a reduced incentive system for the true entrepreneurs, but the corporate culture formalizes their employees’ entrepreneurship skills and strengthens their ability to develop and build their own businesses. During this employment period, the true entrepreneurs may sandbag on their ideas, then leave to start their own technology companies that conceivably end up as an eventual acquisition target for Google and its competitors.

This presents an interesting moral hazard for Google. While they deliberately strive to hire people with a penchant for entrepreneurialism, they may not know which employees are “true entrepreneurs” and which simply have an entrepreneurial spirit willing to share their best ideas with Google. This places even more emphasis on the recruiting and hiring process to vet out which applicants are entrepreneurial, but are not necessarily true entrepreneurs.

While each of these thoughts require additional analysis and research, Lashinsky’s article and listening to Paul Buchheit at a recent SVASE Panel Speaker event got me thinking about the Google-employee incentive relationship. More to come on this idea....

Yahoo's Entrepreneurial Capacity

Attending local Silicon Valley events always seems to provide great fodder for articles and conceptual gymnastics --

I attended an SVASE event last week – “Startup Founders – New Kids on the Block” – where Eric Marcoullier, Founder & CEO of Gnip, served as one of the panelist. Eric developed MyBlogLog (I'm a member) which sold to Yahoo! for $10 million back in January 2007. After less than a year, Eric left Yahoo! and is now in the process of launching Gnip, a stealth company that no one seems to know exactly what it does.

Could this showcase the pending problems that Yahoo! might have with its acquisition spree over the past few years? Yahoo’s strategy has been to acquire new technology companies and then fold them into their product and service offerings. To account for the prices that they pay for these companies, the “Goodwill” account on Yahoo’s Balance Sheet continues to grow – a practice that I’ve recently criticized. When a company’s accounts for intangible assets by using the “Goodwill” account, those intangible assets may include the future innovation and development that the acquisition’s management and employees with bring with them. Advocates of overpaying for an acquisition will often defend the price paid by infusing the argument with the future intangibles yet to be realized.

Entrepreneurs inherently dislike the bureaucracy and structure of a large corporate organization. So what happens when these unrealized intangible assets disappear when key managers decide to leave the acquiring firm? When key managers leave the acquiring firm in short order, then the expected future benefits from those managers are lost.

(Sidenote #1 - Gary Becker, Nobel Prize-winning economist for contributions to the concept of Human Capital, estimated that human capital represented 70-75% of a company’s value.)

(Sidenote #2 - this is one of the reasons that acquiring firms will use its own equity shares in acquisitions instead of cash – the equity paid to the target firm managers can be spread out over a period of time to increase retention of the acquired managers and key talent.)

When Yahoo is purchasing new technology companies such as MyBlogLog, they are attempting to buy “entrepreneurial capacity” that otherwise doesn’t exist organically within its own corporate structure. The struggle that acquiring firms face is that increasing entrepreneurial capacity, according to Becker, is accompanied by “significantly rising costs and that the “accumulation of human capital is not instantaneous” (from Becker’s book - “Human Capital”). If ineffective incentive programs are implemented, this purchase capacity flies out of the window as the key managers walk out of the door.

If other key managers like Eric are walking, so too are Yahoo’s "Goodwill" assets.

H1B Visas: E2 Visa Requirements

I came across an interesting article on TechCrunch that provides a straight-forward guideline to the categories of work visas available for foreigners seeking entrance to the US, especially those seeking employment in Silicon Valley's technology sector.

One of visa categories is the E2 visa - this visa is designed to permit entrance to the US for a foreign investor that adheres to several strict requirements. I did some quick research, and found the specific guidelines for attaining an E2 work visa from Workpermit.com (unfortunately the US Customs and Immigration site doesn’t lay out the requirements as clearly as this…):

1. There has been and will be a substantial capital investment in the US. There is no specific cash threshold defined, but $40,000 is probably an absolute minimum, and any investment below $100,000 would need a very strong case to support it.

2. Risk Capital has been Committed; the investment must entail some risk to the investor (it may not be all in the form of unguaranteed credit). At a minimum, there must be a long-term lease of an office in the US.

3. The investor will control his/her investment. In this respect control is considered to entail owning over 50% of the US enterprise.

4. The cash invested is not marginal when compared to the total investment. In general, unless it is common to the industry to have higher amounts of 'leveraging' (such as in the property industry), 51% of the investment should be in the form of cash equity. Where debt is secured against other assets of the investor, it is considered to be 'at risk', and may be considered as part of the equity invested.

5. The enterprise is (or will be) active. In order to be 'Directing and Developing' their investment, the investor will require an enterprise that involves active management. 6. US workers are (or will be) employed. The treaties envisage more than just creating a job for the principal investor, but there is no requirement to employ a particular number of US citizens. Obviously, employment of large numbers of US citizens would be viewed very favorably.

7. The enterprise, or its principal investor, has a past history of successful trading.

8. That the 'investor' has sufficient acumen to direct and develop the investment enterprise. 9. That the principal investor, and any other E2 staff, are able and willing to leave the US upon termination of their E2 status.

As you can see, the requirements are strict and complete. The E2 Visa should not be considered to be a loophole or back office channel, but for foreigners that are willing to invest in the United States, it can be a very effective entrance opportunity to the United States. With the value of the US Dollar compared to the Euro and British Pound, this might be a good time to think about investing in the United States from abroad if you are a business owner overseas.

Michael Arrington’s complete article on TechCrunch includes a guest posting from Peter Nixey, founder of Clickpass, a start-up firm founded in the UK and now based in Silicon Valley.

Winners! - University of San Francisco Business Plan Competition (2008)

Now the results from the 2008 University of San Francisco International Business Plan Competition:

Grand Prize
Carnegie Mellon University - Dynamics
"Dynamics has invented a low-cost paper-thin, flexible computer. The platform technology is piloting as a security card solution. A proven credit card solution eliminates $22.5 billion of fraud annually by changing a portion of your credit card number both visually (via a display) and magnetically (via a programmable magnetic stripe)."

Second Place
Duke University - Cerene Biomedics
"We are developing an implantable medical device to prevent focal epileptic seizures by delivering targeted thermoelectric cooling to the brain. Brain cooling has been proven to eliminate seizure on-sets; however this has been technologically unfeasible to date. Our device could provide first-line therapy for ~230,000 US refractory epileptic patients."

Finalists
Stanford University - Endurance Rhythm
MIT - Project Einstein
University of Michigan - GIDEON

The University of San Francisco Team led by recent USF EMBA alum, Rob Lahaderne, and leveraging a Lawrence Livermore National Lab technology as part of a new USF-LLNL cooperative effort, gave an outstanding performance, coming in a close second in a highly competitive life science division and earning an Honorable Mention for the contest. Rob will compete again soon in the Draper Fisher Jurvetson Competition.

"New Form Medical Devices: USF
New-Form Medical Devices incorporates Shape Memory Plastics (SMP) to reduce blood trauma from hemodialysis. This business venture has been organized to design, evaluate, and launch medical devices that use SMP as designed and evaluated at Lawrence Livermore National Laboratory. These components will be targeted to hemodialysis centers and home users."

The Professor John Miller Team Spirit Award went to a courageous can-do team from Cambridge University.

The Sustainable Business Award went to an alternative energy proposal from Yale University.

The other award winners will be listed on the University of San Francisco Entrepreneurship Program website shortly.

Economic Arguments for Abandoning H1B Visas

Supporters of America’s H1B visa system argue that firms such as Microsoft and Google (both opposed to the existing system) should simply send these jobs overseas by expanding their current operations in places like China and India. The problem with this argument is that it does not follow economic logic.

There are several economic factors that influence the ongoing development of technology-based industries in the United States. These factors further support the position that the H1B Visa system should be significantly restructured (or abandoned altogether).

1. Agglomeration Economics – As firms in related industries (“clusters”) work in relative proximity to each other, several positive effects are felt:

--> The overall cost of production is reduced because of the increased competition of suppliers and the greater number of firms consuming production inputs. This includes such items as laboratory equipment, software, hardware and other necessary production inputs to developing new technologies .

--> There is an increase in the number of innovations through implicitly shared knowledge.

--> Positive externalities develop - that is - the number of “knowledge spillovers” occur.

These economies of scale and externalities cannot be artificially manufactured by establishing a research park in a foreign country. Economic clusters are complicated organisms that have evolved over time. The organic systems resulted from years in response to market dynamics and locational factors.

2. Labor is not the only factor of economic production. Capital – meaning machinery and related technical equipment - is also a major factor. (Together, Capital and Labor compose the basis of the Cobb-Douglas Production Function upon which economists such as Robert Solow, Greg Mankiw, and Paul Romer have based parts of their research.)

Collect a labor pool of scientists with PhDs from the best universities in world and put them together in Siberia with no research and testing equipment. Their output of new innovations will fall to negligible levels. This basic fact creates another significant advantage to economies such as the United States, and more specifically places like Silicon Valley, that have an inherent base of both private, public, and education sector research and development facilities.

3. Enforceable property rights legislation and intellectual property protection in the United States support research and development better than other developing nations. Countries such as China have a well-documented global reputation for poor enforcement of patent and copyright laws. The ability to develop a new technology and maintain a monopoly on their innovation and idea provides the necessary for profit-maximizing firms to operate. Economies that do not protect a firm’s ability to maximize its profit are not adequate environments for technology firms to effectively operate.

4. And finally, the proximity to a market where the developing firm will be likely to sell whatever technologies it develops plays a role. Technological innovations are likely to be adopted and integrated into the world’s most developed economies first, then eventually trickle down to lesser developed economies. Because firms seek to minimize costs and maximize profits, it makes good business sense to develop technologies in countries where these technologies will be purchased and utilized.

The United States’ comparative advantage in technology industries requires that it be supported the best and brightest global minds regardless of the individual’s country of origin. Without such support, our economy runs the risk of unintentionally developing other “technology clusters” manned by scientists and researchers in other countries. The end result could be the loss of our comparative advantage and our leadership position as the world’s innovator.

The single best solution to maintain our technological leadership is to leverage the privilege of living and working in the United States to attract foreign workers. This labor competition will also pressure the domestic workforce to increase its knowledge and capabilities, resulting in a more effective, innovative labor force.

H1B Visas & American Innovation

Recently, the H1B visa issue has received significant media coverage. In the Wall Street Journal, Miriam Jordan wrote about this issue on March 31 and Shikha Dalmia wrote an editorial in Saturday’s edition.

As Milton Friedman free-marketeer, I share Bill Gates’ viewpoint (detailed in his testimony last year to the US Congress) that the current system should be scrapped to open the American borders to a more effective labor force populated by the best available human capital (labor) available.

Paul Romer, developer of “endogenous growth theory” (or “new growth theory”) showed that technological progress is a primary engine for an economy’s economic growth. The notion of “building a better mousetrap” is the key motivation for profit-maximizing firms in a competitive environment. In short, ideas are “nonrivalrous” – meaning that the developer of a new innovation or idea has a natural monopoly on that idea’s implementation and use. This leads to increasing returns to scale and firm profits. In the context of economic growth, creating an environment where new innovations and ideas are abound results in subsequent increases in an economy’s growth. (Romer’s complete academic article – “Endogenous Technological Change” - is available in The Journal of Political Economy, October 1990.)

The H1B visa system handicaps American firms from employing the world’s best and brightest minds where these individuals could be developing new innovations for these firms, providing increasing returns to its research and development investments.

For obvious national security reasons, developing and enforcing stringent background checks should certainly be required for all emigrants to the United States, but limiting the number of foreign workers solely to protect American jobs frankly sounds a bit socialistic to me. The competitive nature of the market, including the labor market, is a key ingredient to the ongoing success of the US economy during increased economic globalization. Why should we deliberlately disadvantage American companies?

What if the United States decided in 1933 that we had reached our quota of foreign workers, disallowing Albert Einstein’s entrance to the country?

Yahoo!'s Valuation - Goodwill leads to Goodwill

Recent word is that Microsoft has no plans to raise its $44.6 billion bid for Yahoo! Inc. $44.6 billion got me wondering how this matched up to Yahoo's value based on its balance sheet. I found one item to be particularly interesting - "goodwill" - which seems to be indicative of Yahoo! Inc.'s problems, and could be leading the company to Goodwill Industries very soon. How about a new logo?

As defined on Investopedia - "goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company." In other words, goodwill is the extra that you pay for after accounting for the actual company assets.

Keep in mind that I don't know what the media industry norms are with regard to the goodwill-to-acquisition price ratios, but looking at the Yahoo! Inc.'s 2007 Annual Report, it seems to me that they're pretty good at throwing cash into the goodwill bucket for acquisitions without getting much of a tangible return.

A few examples from Yahoo! Inc.'s 2007 10-K to illustrate (this info is found around page 70-85 of the report...):

1. Purchase of SOFTBANK, a firm with which Yahoo! had a couple of joint ventures (2005)

Total purchase price = $500 million in cash
Amount of purchase price allocated to Goodwill = $388 million

2. Purchase of Right Media (2007):

Price = $526 million ($246 in cash, $237 in equity)
Amount of purchase price allocated to Goodwill = $440 million

3. Purchase of Zimbra (2007):

Price = $302 million ($290 in cash)
Amount of purchase price allocated to Goodwill = $241 million

4. Purchase of Blue Lithium (2007):

Price = $255 million ($245 in cash)
Amount of purchase price allocated to Goodwill = $221 million

5. Alibaba (2005):

Price of 46% of shares = $1 billion in cash
Amount of purchase price allocated to Goodwill in 2007 = $443 million

Like I said, I don't know what the normal allocation to goodwill as a percentage of total purchase prices in the media business, but when I look at these transactions, I see a significant trend -

Yahoo! likes to take cash from its pockets and exchange it for an accounting asset called "goodwill" that you can't touch or see. These investments are not all-inclusive of all of the deals on Yahoo! Inc.'s books, but just up the cash spent on these five examples and you get nearly $2.3 billion.

I'd like to think that the brain trust at Yahoo! Inc. would like to have that $2.3 billion to spend on projects developed internally to produce organic company and product growth. Perhaps these actions are a microcosm of what's happened to the Yahoo! brand. A company that led the Web 1.0 revolution is now becoming a sideline watcher in the Web 2.0 and Web 3.0 evolution.

To put some perspective Microsoft's $44 billion offer - Yahoo! generated $6.9 billion in revenue in 2007, putting Microsoft's offer at a bit more than 6x revenues. Compare that to Microsoft's valuation of Facebook at $15 billion, estimated to be 500x revenues.

Tips for Entrepreneurs from Sequoia Capital

If you're an aspiring entrepreneur, the "Ideas" page on the Sequoia Capital website is an outstanding resource. It's rare (very rare) that a start-up can submit a business plan without any prior contacts and meetings with a venture capital firm and receive financing. But, this page is an outstanding primer of the themes and ideas that you'll need to tackle in order to build a successful company.

The Predictions Business...

The Industry Standard is back in the publishing business again. For those of you, okay, for those of us, that feel compelled to be right all the time, they have their "Predictions Board." Put your money where your mouth is - wager $100,000 in Standard Dollars on predictions in the tech industry.

If there's competition and a bit of gambling involved, count me in. I already see some predictions about FaceBook, Salesforce, and a few others that I like.

Last time I had an encounter with the Industry Standard was one of their roof top parties back in 1999 or so... Wonder if they'll be throwing galas like that again...

Free Information for sale...

Working with Altos Research over the past six months, it's been fascinating to not just have a front row seat in the theater, but be up on stage as one of the main cast members. Sales and subscribers and growing every month, and the use cases of the residential real estate market data that we collect and provide to our subscribers are becoming more and more diverse.

The Altos Market Reports and AltosCharts compose the crux of our product line for real estate professionals (agents, mortgage lenders, title reps, etc.). The reports are updated weekly, providing our subscribers with local market information to share with their clients about the constantly changing real market dynamics.

Our CEO, Mike Simonsen, passed along a link to a blog post by Kevin Kelly from Wired Magazine titled "Better Than Free" that discusses how free data on the Internet is valuable and can be sold if packaged correctly. It's a striking post and motivated me to do a quick analysis of the Altos Market Reports and AltosCharts to see if we meet the criteria in Kevin's article. Turned out to be a remarkably pleasant experience. Seems we're doing things pretty well here at Altos Research....

Immediacy - Check! The Altos Market Reports are updated every week and available for download on Monday of each week, reflecting market data collected from the Friday before.

Personalization - Check! Market Reports include the contact information, photo, and logo of each subscriber. This enables our clients to utilize the reports for outbound marketing and impress the heck out of their clients and potential clients in listing and update meetings.

Interpretation - Check! Subscribers receive a training session over the phone regarding the market stats in our reports and how to use them effectively with their clients. In addition, we're launching a User Forum this week where subscribers will be able to collaborate on use cases.

Authenticity - Check! There is a branding aspect to the Altos Market Report and the AltosCharts. The reports are copyrighted to Altos Research, and our clients like that we're a third-party, objective source data. Being able to rely on our data collection reliability and accuracy enables clients to support their argument with their clients.

Accessibility - Check! All subscriber reports are hosted at Altos Research - just log in, download the report(s) needed, and off you go. Additionally, we're launching a CRM application that enables real estate professionals to auto-send copies of the market reports directly to their clients are part of their drip marketing campaigns.

Embodiment - Check! All of the market data/stats published in the Market Reports is available for display using AltosCharts - a "widget" that is posted to a website, updates itself automatically every week with new data, and can be utilized as a web conversion tool.

Patronage - Check! From the early days of availability, our clients have been enthusiastic subsribers. With a retention rate over 90%, there's no doubt the Altos Research clients see the value for their subscription fee.

Findability - Check! Clients continuously share stories about how our Market Reports and specific data within has helped them with their clients and getting the next listing. This is often the same data found in alternative sources, but not with the clear packaging and presentation necessary to communicate the key ideas.

Fun stuff - sometimes its okay to give yourself a little pat on the back....

Innovation, Google & Employee Retention

[Author's note: A new article on this blog regarding Google employee retention is also available.)

A recent Wall Street Journal article - "Start-Ups Make Inroads
With Google's Work Force" has many people in the technology and business community clamoring with regard to Google’s innovation and employee retention challenges.

Google has long been a source of personal interest, stretching back to 2000 when I was first introduced to the website by a business school professor. What most intrigues me about Google is its culture of innovation and development. I organized a tour of Google for an executive MBA cohort from Kyiv-Mohila Business School in 2005 and obtained brief exposure to its corporate life.

In reading the WSJ article, I began to think about Google’s innovation strategy from an economic point of view, and found the following “Equilibrium Innovation” model in a textbook sitting on shelf (stick with it - it's not as complicated as it looks!):



Where:

CoI = Cost of Innovation
PVI = Present Value of Innovation
L_R&D = Amount of Resources devoted to R&D
g = Innovations/year
B = Amount of resources needed to create an innovation

(Source: Van Den Berg, Hendrick. “Economic Growth and Development,” c. 2001, McGraw-Hill. Page 216.)

PVI is a function of the monopoly profit (π), discount rate (r), and L_R&D/B.

CoI is a function of the price of resources (w) and the amount of resources needed to produce an innovation (B).

This graphical model shows that as more resources are dedicated to R&D, the “Cost of Innovation” increases and the Present Value of Innovation decreases. In economic terms, the CoI curve is the “marginal cost curve” and the PVI curve is the “marginal benefit curve.”

So how does this relate to Google and its innovation strategy?

An article printed in the July 10, 2006 edition of BusinessWeek , considers the success rate of Google’s innovations – citing that the success rate of new products at Google is below planned corporate levels.

According to their 2006 annual report, Google anticipates “that research and development expenses will increase in dollar amount and may increase as a percentage of revenues in 2007 . . . because we expect to hire more research and development personnel and build the infrastructure required to support the development of new, and improve existing, products and services.”

In order to maintain the innovation growth rates of previous years, say from 2002 – 2004, Google is looking at a HUGE expenditure if it considers this investment in R&D in a per employee basis. Employee counts at Google have risen tremendously in the past 3-4 years, from approximately 1500 employees in 2003, to 3000 in 2004, to 7000 in 2005, to 11,000 in 2006.

Going back to our model and considering the R&D and infrastructure costs on a per employee basis, this equates to a potentially substantial rise in the Cost of Innovation (CoI), especially as labor markets remain competitive during the current period of economic growth – leading to a higher price of resources (w) and the increasing amount of resources necessary to create an innovation (B). As CoI shifts upwards, the number of innovations will ultimately decrease.

Regarding PVI, increases in B will contribute to a lower PVI. Additionally, as innovation occurs more rapidly, the monopoly profit that Google will receive for their innovation will decrease because new innovations will overtake the usefulness of current innovations (Joseph Schumpeter and “creative destruction”). These factors will shift the PVI curve downward, further decreasing the number of innovations produced.

If we couple two factors:

1. The effects of shifts in CoI and PVI due to higher overall innovation costs; and
2. The appearance of Google’s “shotgun” approach to innovation

the net result is slower innovation and development within the company.

If Google has had a penchant for hiring those unique individuals that want to innovate, incubate, and develop new ideas but their internal structure inhibits employees from doing so, this may explain the reported move of employees to new companies and start-ups.